Several Cue Sheet items in 2020 dug into the murky world of ghost kitchens. Dickey's Barbecue Pit, the world's largest barbecue chain, and its rival Famous Dave’s both announced that they were launching new virtual operations with no physical location for on-premise dining. Operating out of leased commercial kitchens or even inside other restaurants, these ghost ventures sell food exclusively via app-based delivery services like GrubHub and UberEats.

I also dug into CloudKitchens, the secretive new venture from Uber co-founder Travis Kalanick that has been quietly transforming old light industrial facilities into ghost kitchens. Along the way, they’ve launched a series of “facility brands” like OMG BBQ LOL that appear side by side on the apps with traditional brick and mortar restaurants. The food is actually cooked by a variety of subcontractors, including food truck operators who post up in the parking lots of CloudKitchens’ still-unfinished ghost facilities and, even stranger, established independent restaurants that fulfill orders for the “delivery-optimized” brands from their own kitchens—in many cases competing with their own delivery sales.

There are billions upon billions of dollars behind these new ventures, but I don’t see them as the inevitable future of the restaurant industry—and especially not of the barbecue industry.

For starters, the financial model doesn’t seem to work on any side of the equation. For the operators who lease ghost kitchen facilities, the lure of low startup costs quickly fades against the reality of high fixed operating expenses. These include commissions for the delivery services, which can be as high as 30% of each order, and for the ghost kitchen facility (typically 15 - 30%) and potentially another 10% commission for sales through a “facility brand.” Add these on top of food costs (typically 30% of the total price of meal) and there’s not a lot of room left for, say, paying workers, much less for the operators themselves to take home. Little wonder that reporters from the Los Angeles Times who dug into the experience of ghost kitchen tenants found many were actively looking to get out and move into a traditional brick and mortar location.

Things don’t look much rosier on the side of the ghost kitchen capitalists and app delivery services, either. Before the pandemic gave them a massive infusion of unexpected revenue, all of the app-based delivery companies were hemorrhaging money in a seemingly endless race to the bottom. Desperate to buy market share in an environment with near-zero consumer switching costs, they've blown through investor cash with deeply-discounted promotions and engaged myriad questionable marketing practices, like listing restaurants on their apps without the restaurateur’s consent.

It’s an open question whether food delivery will remain the “new normal” or consumers will abandon the apps in favor of in-person entrées once it’s safe to do so. My bet is on the latter, for two simple reasons. First, a meal served fresh to order at a restaurant is far superior to soggy, lukewarm food brought to your door by some surly stoner kid. Second, there’s much more to the restaurant experience than just filling your belly—the ambience, the hospitality, the buzz of conversation around you.

I predict the app companies will continue to burn though billions in venture capital dollars, making make their founders ludicrously rich in the process. Far from “disrupting” the industry, though, they’ll ultimately settle into a relatively small niche in the overall restaurant market. And I think that will be especially true when it comes to barbecue.

via Robert Moss's Cue Sheet newsletter